Twenty-five years ago, Angelo and Fred started their own consulting company, XYZ Co. Angelo, who is 55, retired from the business on December31, 2020. He and his wife plan to travel throughout Canada during retirement.

It is now January5, 2021. Fred would like to purchase Angelo's 50% share of XYZ.

Earnings have been stable over the past 10 years, and Fred and Angelo have agreed to a purchase price of three times the prior year's earnings after tax. Since Angelo's wife already has a trip booked for early February, both Fred and Angelo would like to have the transaction wrapped up as quickly as possible. They have asked you, CPA, to review the attached income statement and notes and provide an estimate of XYZ's federal income tax expense for 2020 and let them know if they need to pay any further instalments to the Canada Revenue Agency (CRA).

Fred does not anticipate having the cash resources to complete the purchase and is concerned about his ability to pay the debt service costs if he has to borrow money to purchase Angelo's shares. As the two men are friends, Fred would like to structure the purchase so that it provides the optimal tax advantage to Angelo.

Fred has heard about the capital gains exemption and wonders whether it could be applied to this transaction. Neither Angelo nor Fred has disposed of any capital properties in the past. XYZ only holds assets that are essential to the operation of the business.

Fred and Angelo would like you to write memo providing advice on how to structure this transaction.

Appendix I XYZ Co. draft nancial statements Draft unaudited statement of earnings For the year ending December 31 2323 Revenue 3 449,333 Expenses Salaries and wages 123,423 Utilities 13,32 5 Insurance 4,666 Travel and conferences 13,223 Repairs and maintenance 19,565 Miscellaneous 29,1 14- Professional fees 24,33? Amortization 1 1,533 Interest expense 1 ,6 3 2 Meals and entertainment 6,359 Golf membership 3,42 3 Total expenses 253,329 Income before taxes E 195,621 Notes: 1. 53': had made investments in equipment to support their business. December 31, 2319, the equipment had an undepreciated capital cost of $23,333 in Class 3. 2. Interest was incurred in 2323 because XYZ _did_r:_l_t le its 2319 tax return until August 2323. As there was a small balance during, the CRA assessed interest and penalties of $1,632- 3. m qualies for the small business deduction and has a tax rate of 9%. 4-. During the year, XYZ made tax instalments of $23,333 to the CRA